Damage Claim Must Be Paid In Cash

June 26, 1988|By Robert Bruss.

James sold a lot to Charles for $1,550.91 cash down payment with the $27,000 balance financed by a mortgage from Citicorp. Stewart Title Co. insured Citicorp`s mortgage. But after the sale was closed, Citicorp discovered Charles had been declared mentally incompetent 26 years before the purchase so the mortgage was invalid.

Citicorp filed a claim with Stewart Title Co. Stewart obtained a quit claim deed to the property, with court approval, upon paying $1,550.91 to Charles` legal guardian. Then Stewart Title deeded the property to Citicorp. However, Citicorp refused to accept the property, arguing its lender`s title insurance policy requires cash payment of $27,000 since Charles was incompetent to make a mortgage contract.

If you were the judge would you allow Stewart Title Co. to pay Citicorp`s title insurance claim by delivering the property title rather than the $27,000?

The judge said no.

A contract signed by a person who has a legal guardian is voidable, the judge explained, because the guardian is free to enforce or reject such a contract. Here, the guardian rejected the mortgage contract upon learning about it and executed a quit claim deed to Stewart Title in return for refund of the $1,550.91 down payment paid by Charles, the judge noted.

But the issue is whether Stewart Title can give Citicorp a deed to the insured property rather than pay Citicorp`s $27,000 cash demand since Citicorp would not have made the loan if Charles` incompetency had been known, the judge emphasized. Looking to the title insurance policy, it does not say the insurer may tender the property`s deed in lieu of damages, he continued.

``By implication, damages are not payable in real estate, any more than they are payable in potatoes or colored beads,`` the judge wrote. ``Stewart Title failed in its duty to check the lien`s validity. It now seeks to have us stretch the policy`s language so that Citicorp bears the costs of sale plus any decline in the property`s value, even though without Stewart Title`s mistake Citicorp never would have loaned any money to Charles,`` the judge explained.

Since Stewart Title failed to discover Charles` incompetence and tender of a deed to Citicorp did not cure that breach, Stewart Title is ordered to pay $27,000 to Citicorp, the judge ruled.

Based on the 1988 U.S. Court of Appeals decision in Citicorp Savings vs. Stewart Title, 840 Fed. 2d 526.